Partial information about contagion risk, self-exciting processes and portfolio optimization

Nicole Branger, Holger Kraft and Christoph Meinerding

No 28, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: This paper compares two classes of models that allow for additional channels of correlation between asset returns: regime switching models with jumps and models with contagious jumps. Both classes of models involve a hidden Markov chain that captures good and bad economic states. The distinctive feature of a model with contagious jumps is that large negative returns and unobservable transitions of the economy into a bad state can occur simultaneously. We show that in this framework the filtered loss intensities have dynamics similar to self-exciting processes. Besides, we study the impact of unobservable contagious jumps on optimal portfolio strategies and filtering.

Keywords: Asset Allocation; Contagion; Nonlinear Filtering; Hidden State; Selfexciting Processes (search for similar items in EconPapers)
JEL-codes: G01 G11 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-ore
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https://www.econstor.eu/bitstream/10419/88730/1/775811742.pdf (application/pdf)

Related works:
Journal Article: Partial information about contagion risk, self-exciting processes and portfolio optimization (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:28

DOI: 10.2139/ssrn.1633479

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